No Slack

No Slack: The Financial Lives of Low-Income Americans

MICHAEL S. BARR
Copyright Date: 2012
Pages: 294
https://www.jstor.org/stable/10.7864/j.ctt1280xc
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  • Book Info
    No Slack
    Book Description:

    The financial crisis exposed the potentially unsavory results of the interaction between low- and moderate income households and alternative and mainstream financial institutions. Many households were overleveraged or paid high costs for financial services, while others lacked access to useful financial products that can cushion against economic instability. The financial services system is not well designed to serve low- and moderate-income households, leaving them without financial slack: they did not have adequate breathing room for making the financial adjustments that would permit them to better meet their own needs.No Slackshows us why these families were the least prepared to handle the shock of the deep recession.

    This pivotal analysis focuses on the Detroit metropolitan area's low- and moderate-income neighborhoods, which are similar to those of other Rust Belt communities. The Detroit Area Household Financial Services study -conducted at the height of the subprime lending boom -examines these households' decisionmaking processes, behaviors, and attitudes toward a full range of financial transactions.

    No Slackreveals widespread problems in home mortgage lending, the common threads among people who file for bankruptcy, the reasons so many households are unbanked, and how behaviorally informed financial regulation can make the market work better. Drawing on his deep policy experience, Michael Barr advocates helping families seek financial stability in three primary ways: enhancing individuals' financial capability, using technology to promote access to financial products and services that meet their needs, and establishing strong protections for consumers.

    eISBN: 978-0-8157-2234-2
    Subjects: Finance, Sociology

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Acknowledgments
    (pp. vii-x)
  4. 1 Introduction
    (pp. 1-21)
    MICHAEL S. BARR

    Low-income individuals often lack access to the type of financial services that middle-income families can take for granted, such as checking accounts, direct deposit, bank loans, or saving opportunities. High-cost or low-function financial services, barriers to saving, lack of insurance, and credit constraints increase the economic challenges faced by low-income families. Using a unique data set from a survey I designed and that was administered in 2005–06 by the Survey Research Center at the University of Michigan to more than a thousand households in the Detroit area, this book analyzes the financial constraints and choices of low-income families and...

  5. 2 Managing Money
    (pp. 22-53)
    MICHAEL S. BARR

    This chapter presents an overview of the empirical evidence documenting the financial services behavior and attitudes of low- and moderate-income (LMI) households. The Detroit Area Household Financial Services (DAHFS) survey uses a random, stratified sample to explore the full range of financial services used by LMI households, together with systematic measures of household preference parameters, demographic characteristics, and households’ balance sheets.¹ Results from the study suggest that the structure of formal and informal financial services makes it more difficult for low- and moderate-income households to manage their money. Given the lack of financial slack these households have, managing their finances...

  6. 3 And Banking for All?
    (pp. 54-82)
    MICHAEL S. BARR, JANE K. DOKKO and BENJAMIN J. KEYS

    The use of alternative financial services—such as check cashers, pawnshops, and payday lenders—among low- and moderate-income (LMI) households presents challenges to policymakers seeking to improve financial outcomes among those with few economic resources. That LMI households choose these alternative financial services, in spite of their monetary cost, suggests that they value these services and would find regulations banning them outright harmful. Policies such as “lifeline” banking have aimed to make traditional bank accounts more available, but banks have generally seen these programs as unattractive and have not marketed them widely; as a result, the programs have had low...

  7. 4 Preferences for Plastic
    (pp. 83-114)
    MICHAEL S. BARR, JANE K. DOKKO and ELEANOR McDONNELL FEIT

    This chapter characterizes the features of an account-based payment card—including bank debit cards, prepaid debit cards, and payroll cards—that elicit a high take-up rate among low- and moderate-income (LMI) households, particularly those without bank accounts. We apply marketing research techniques, specifically choice modeling, to identify the design of specific financial services products for LMI households, who often face difficulties acquiring or maintaining standard bank accounts but need banking services. After monthly cost, we find that, on average, nonmonetary features of a payment card, such as the availability of federal consumer protection, are factors LMI consumers weigh most heavily...

  8. 5 Which Way To The Bank?
    (pp. 115-132)
    MICHAEL S. BARR, JANE K. DOKKO, RON BORZEKOWSKI and ELIZABETH K. KISER

    Currently, in the United States, geographic access to retail banking services is unequal across communities. In particular, households living in wealthier communities tend to travel shorter distances to bank branches and have more branches available in their neighborhoods from which to choose. Low- and moderate-income neighborhoods, on the other hand, tend to have fewer bank branches and more “fringe banking,” through alternative financial services (AFS) providers such as check cashers, payday lenders, pawnshops, and grocery or liquor stores providing transactional financial services and shortterm lending (Caskey 1994). Furthermore, holding the observable economic characteristics of neighborhoods constant, communities with a higher...

  9. 6 Borrowing to Make Ends Meet
    (pp. 133-155)
    MICHAEL S. BARR, JANE K. DOKKO and BENJAMIN J. KEYS

    Many low- and moderate-income (LMI) households use short-term credit products provided by firms that operate outside the mainstream banking sector (Barr 2004, 2005). These products include payday loans, pawnshop services, refund anticipation loans (RALs), and rent-to-own. Low- and moderateincome households also access short-term credit through credit cards, as well as through nontraditional types of credit-card products, such as secured credit cards or cash-advance options, and by using overdraft services provided by banks. The finance charges and fees associated with short-term credit products can be high (Drysdale and Keest 2000).¹ Furthermore, some short-term loans, such as payday loans, can be rolled...

  10. 7 High-Cost Home Ownership
    (pp. 156-178)
    MICHAEL S. BARR, JANE K. DOKKO and BENJAMIN J. KEYS

    In spite of the recent impetus to reform home mortgage markets, particularly as they affect low- and moderate-income (LMI) households, little systematic evidence is available about how potential abuses in mortgage lending manifest in the mortgages held by those households. While racial discrimination in mortgage markets has a long history in the United States, the role of mortgage brokers in lending has only recently increased and become controversial.¹ In this chapter, we uncover two groups of LMI home borrowers who are subject to differential mortgage pricing: black borrowers and borrowers who use mortgage brokers pay more for mortgage loans than...

  11. 8 Living on the Edge of Bankruptcy
    (pp. 179-203)
    MICHAEL S. BARR and JANE K. DOKKO

    The debate over federal bankruptcy reform, including the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and recent legislative efforts to permit home mortgage principal to be reduced through bankruptcy in the wake of the foreclosure crisis of the last several years, reflects policy makers’ beliefs on the causes of bankruptcy and inspired a spirited dialogue among academics about households’ decisions to file for bankruptcy (Keys 2010; Sullivan, Warren, and Westbrook 1989, 2000, 2003; Warren and Tyagi 2003; White 1998; Fay, Hurst, and White 2002; Jacoby, Sullivan, and Warren 2001; Gross and Souleles 2002; Gan and Sabarwal 2005; Mann...

  12. 9 Expensive Tax Refunds
    (pp. 204-217)
    MICHAEL S. BARR and JANE K. DOKKO

    The U.S. federal income-tax code has an enormous potential to shape the economic and financial decisions of tax-paying households. Tax rates, compliance laws, and the withholding system all create incentives, as do the methods by which the U.S. Treasury collects tax receipts and disburses tax refunds. The role of third-party service providers in the tax system is less well understood, even though tax preparation firms have a prominent role in the U.S. tax system. Nationally, more than half of taxpayers use paid preparers to submit their tax returns. Low- and moderate-income (LMI) households are among those who use the paid...

  13. 10 Paying to Save
    (pp. 218-245)
    MICHAEL S. BARR and JANE K. DOKKO

    In the United States, the Internal Revenue Service (IRS) collects taxes on earned income by requiring employers to remit a portion of the employees’ paychecks as a prepayment of the taxes owed at the end of the year. If the amount prepaid is greater than the taxes owed, then the employee has overwithheld and is entitled to a tax refund in the amount of the difference. Overwithholding occurs at many income levels and is a common phenomenon among low- and moderate-income (LMI) taxpayers. In 2004 over 20 million LMI taxpayers filed for approximately $35 billion in federal tax refunds and...

  14. 11 Behaviorally Informed Regulation
    (pp. 246-278)
    MICHAEL S. BARR, SENDHIL MULLAINATHAN and ELDAR SHAFIR

    Policymakers typically approach human behavior through the perspective of the “rational-agent” model, which relies on normative, a priori analyses. The model assumes that people make insightful, well-planned, highly controlled, and perfectly calculating decisions guided by considerations of personal utility. This perspective is promoted in the social sciences and in professional schools and has come to dominate much of the formulation and conduct of policy. An alternative view, developed mostly through empirical behavioral research, and the one we articulate here, provides a substantially different perspective on individual behavior and its policy implications. According to this empirical perspective, behavior is an amalgam...

  15. 12 Epilogue: Crisis and Reform
    (pp. 279-286)
    MICHAEL S. BARR

    When President Obama came into office three years ago, our financial markets were frozen, our economy was shrinking, and we were facing the worst economic crisis our country has endured since Franklin Roosevelt came into office facing the Great Depression. At the end of 2008 and beginning of 2009, our nation was losing nearly 800,000 jobs a month. Small businesses were closing their doors. And home prices were in free fall. The president acted boldly to save the economy and restart growth. Although the economy has been stabilized and businesses are hiring again, the country is not growing rapidly enough,...

  16. About the Authors
    (pp. 287-288)
  17. Index
    (pp. 289-294)
  18. Back Matter
    (pp. 295-296)